William Lawrence v. Commonwealth of Kentucky, 775 F.3d 789

Background

In July 2007 Eagle Development paid a $962,574.93 “good faith” deposit to the Kentucky Transportation Cabinet under a Purchase Agreement to buy state land; Eagle later assigned the Agreement to Shelbyville Road Shoppes, LLC (the debtor).
The Agreement allowed the deposit to be applied to the purchase price at closing and contained a forfeiture clause making the deposit liquidated damages if purchaser failed to close.
An addendum extended the closing deadline; two days before the final extension expired the debtor filed a voluntary Chapter 7 petition (Jan. 11, 2011).
The contract was deemed rejected under 11 U.S.C. § 365(d)(1); the trustee sought turnover of the deposit from the Cabinet under 11 U.S.C. §§ 541 and 542.
Bankruptcy and district courts held the trustee could not compel turnover because the debtor had no present legal or equitable interest in the deposit at filing and the deposit was not held in escrow.
The Sixth Circuit affirmed: the deposit was not property of the estate, rejection did not undo the already-executed payment, and no equitable remedy entitled the debtor (or trustee) to the funds.

Issues

Issue	Plaintiff's Argument (Trustee)	Defendant's Argument (Cabinet)	Held
Whether the good-faith deposit was property of the bankruptcy estate under § 541 and thus subject to turnover under § 542	The deemed rejection eliminated the executory forfeiture clause, leaving no contractual right in the Cabinet and leaving the deposit as the debtor’s property that the trustee can turn over	The debtor never had a present right to possess or a standalone interest in the deposit at filing; the deposit was paid to the state and not held in escrow	Held for Defendant: deposit was not estate property and trustee cannot demand turnover
Whether rejection under § 365(d)(1) revested or otherwise returned the deposit to the debtor/trustee	Rejection voids the forfeiture clause so the Cabinet lost any entitlement to the deposit	Rejection affects only executory obligations; it does not undo already-executed payment or create a new right in the debtor	Held for Defendant: rejection did not reverse the executed payment or create a standalone debtor interest
Whether debtor had an equitable right to the deposit because the Cabinet could not deliver deed post-petition	Trustee: viewing performance across time, debtor was performing pre-petition and post-petition failure to deliver title (due to bankruptcy) makes refund equitable	Cabinet: both parties were performing at petition date; no pre-petition circumstance entitled debtor to refund; equitable relief would unjustly shift timing of performance	Held for Defendant: no equitable interest existed at filing, so no turnover remedy
Whether the deposit was held in escrow or the transaction was a contract for deed, making funds turnoverable	Trustee: state control of account and label “special deposit trust fund” functionally created escrow; thus funds should be turned over	Cabinet: funds were delivered to the grantee (state), not a third-party escrow agent; contract did not create escrow or immediate possession by buyer, so not a contract for deed	Held for Defendant: not escrow, not contract for deed; deposit not subject to § 542 turnover

Key Cases Cited

Segal v. Rochelle, 382 U.S. 375 (1966) (loss‑carryback refund claims can be property of the estate when rooted in pre‑bankruptcy activity)
United States v. Whiting Pools, Inc., 462 U.S. 198 (1983) (trustee may compel turnover where debtor retained statutory ownership or redemption right pre‑petition)
Lyons v. St. Emps. Ret. Sys. of Ill., 957 F.2d 444 (7th Cir. 1992) (trustee cannot obtain funds if debtor lacked present right to withdraw at petition)
Leasing Serv. Corp. v. First Tenn. Bank Nat’l Ass’n, 826 F.2d 434 (6th Cir. 1987) (rejection prevents specific performance of then‑executory contract provisions)
In re Coomer, 375 B.R. 800 (Bankr. N.D. Ohio 2007) (debtor’s security deposit interest without present possessory right is not turnoverable)
In re Lauria, 243 B.R. 705 (Bankr. N.D. Ill. 2000) (turnover cannot be used to create possession rights the debtor lacked at commencement)